The interconnected nature of centralized and decentralized crypto lending is presenting a growing systemic risk, according to a report by Galaxy Digital’s research arm on first-quarter borrowing data. As of March 31, the report estimated that there was over $39 billion in outstanding crypto-collateralized debt across various platforms.
DeFi protocols accounted for 45.3% of the total debt, centralized venues accounted for 34.6%, and collateralized stablecoins accounted for 20.1%. The report highlighted that many centralized desks are utilizing DeFi rails to raise short-term liquidity and then lend the funds off-chain. This duplication of debt obligations across on-chain data and private ledgers is artificially inflating borrowing figures and complicating real-time risk assessments during market stress.
The report also pointed out the potential risks of cross-venue liquidations. Sharp price declines can trigger automated liquidations on DeFi platforms, followed by centralized desks recalling loans or liquidating client collateral on exchanges. This can lead to further price pressure and market volatility, especially for widely used assets like Bitcoin, Ethereum, and Staked ETH.
Furthermore, corporate treasuries have added another layer of credit to the system by issuing convertible and zero-coupon notes to finance crypto holdings. Companies like Strategy, Riot Platforms, and Twenty One Capital have issued these notes, with Strategy alone owing $8.2 billion. To manage short-term obligations, many firms rely on OTC stablecoin loans, which are priced based on prevailing DeFi rates.
The report concluded that while the diversification of credit channels has increased borrowing capacity, it has also strengthened the transmission of shocks across the system. Without standardized disclosures or on-chain attribution for entity-level exposures, regulators and market participants are left in the dark about the full scope of risk embedded in crypto credit markets.
In light of these findings, it is crucial for stakeholders to closely monitor the evolving landscape of centralized and decentralized crypto lending to mitigate systemic risks and ensure market stability.